A Tale of Tax Policies in Open Economies

GATE Working Paper No. 1138

42 Pages Posted: 3 Jan 2012

See all articles by Stéphane Auray

Stéphane Auray


Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Paul Gomme

Concordia University; CIREQ

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2011


Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduction in the government deficit-to-GDP ratio through raising one of: the consumption tax, the labor income tax, or the capital income tax. In terms of welfare, the consumption tax is found to be the least costly of the tax increases. A second set of experiments looks at deficit-neutral tax changes: partially replacing the capital income tax with either a higher labor income tax or higher consumption tax; and partially replacing the labor income tax with an increased consumption tax. Reducing reliance on capital income taxation is welfare-enhancing, although it leads to short term losses. Reducing labor income taxation improves international competitiveness and is welfare-improving.

Keywords: Fiscal policies, open economies, public deficits, tax reforms

JEL Classification: E31, E62, F41

Suggested Citation

Auray, Stéphane and Eyquem, Aurélien and Gomme, Paul, A Tale of Tax Policies in Open Economies (December 1, 2011). GATE Working Paper No. 1138. Available at SSRN: https://ssrn.com/abstract=1978842 or http://dx.doi.org/10.2139/ssrn.1978842

Stéphane Auray (Contact Author)

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Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

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Paul Gomme

Concordia University ( email )

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CIREQ ( email )

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Montreal, Quebec H3C 3J7

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